1 JUN 2011
By Mario I. Blejer (former governor of Argentina’s central bank
) | Bloomberg
One of the undeniable features of the European debt crisis is the tendency to obscure, verbally and politically, the real issues at play. Euphemisms, statistical gimmicks, meaningless institutional squabbling, undecipherable acronyms, and plain double talk proliferate as part of the debate.
In my experience as central-bank governor in Argentina during the worst financial crisis in our history, at the beginning of this century, I learned how useful it is to cut through the fog in order to rebuild credibility and to allow a more lucid evaluation of the outlook. While there are few similarities between Greece’s present debt situation and Argentina’s in 2002, it is possible to reduce the recent talk of a default to four basic issues and make some predictions.
The nature of the debt problem in peripheral Europe is structural. Since it doesn’t reflect a temporary liquidity squeeze, the approach adopted so far can’t resolve it. The strategy in progress has been to pile new debt upon the existing stock. New loans are used to pay old debt, in addition to financing remaining fiscal gaps. This is why the Ponzi scheme analogy is appropriate. And while the pyramid is growing, the share of peripheral debt held by state-owned institutions also keeps getting bigger. This means that when it all finally collapses, it is the taxpayers of Europe, and the world, that will bear the full cost.
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